National Workshop: The Roles and Benefits of Sustainable Development from Banking Perspectives

15 December 2005 | Batam, Indonesia

UNEP FI participated as a speaker in this high profiled National Workshop hosted by the Ministry of Environment of the Republic of Indonesia and Bank Indonesia, the central bank. Press Release & Event Report in Indonesian:

Summary of discussions

Environmental considerations are a basic element for the growth of the banking sector. They are anticipatory elements in assessing its financial and non-financial risks.

BI and the Ministry of Environment have signed an MOU envisaged to improve the banking role in protecting the environment.

BI has been encouraging the banking sector to be concerned with environmental issues in their financing activities. BI’s Regulation (PBI) issued in January 2005 stipulates that productive-asset assessment by a bank to its client should refer to and comply with the Ministry of Environment’s guideline. The PBI will be updated and promoted as a guideline to the banking sector, i.e. so as to clarify on the minimum requirements.

Ministry of Environment has launched the Program of Penilaian Peringkat Kinerja Perusahaan dalam Pengelolaan Lingkungan Hidup (PROPER) which is a performance ratings program that qualifies the degree of environmental compliance by which corporations (commercial banks included) are rated against a set of criteria with its respective carrot-or-stick consequences.

^topSigning up to the United Nations Environment Programme Finance Initiative & RemarksSigit Pramono, President Director of BNI

Overview of the Indonesian environmental regulations for the banking sector: Bank Indonesia regulation no. 21/9/UKU/1989 dated 25 March 1989 on “Investment Credit and Equity Participation”; the Banking Law or Act no. 23 of 1999, amended through Act. No. 3 of 2004; and Bank Indonesia’s latest regulation PBI no. 7/2/PBI/2005 dated 20 January 2005, on the “Assessment of Quality of Productive Assets Owned by Commercial Banks” (recorded in the State Gazette no. 12 of 2005), with its implementing regulation Bank Indonesia Circular no. 7/3/DPNP dated 31 January 2005. National ordinance relating to these legal bases are Law no. 23 of 1997 and the Government Regulation no. 27 of 1997 on the Environmental Impact Analysis (AMDAL).

the right and responsibility of each individual towards environment protection;

the need for banks to protect themselves in their various forms of financing; and

bank management can be legally implicated for failures in complying with environment-related policies.

In order to protect and improve credit quality, suggests including environment-related covenants in credit agreements, such as conditions precedent, representation and warranties, affirmative covenants, negative covenants, and events of default.

Environmental management by debtors (particularly large-scale ones), constitutes one of the most important factors in the credit quality assessment. Environmental concerns are increasing influencing reputation, which in turns will render impact on competitiveness, and eventually cash flow.

Government regulations such as environmental impact analysis (AMDAL) requirements and performance ratings program (PROPER) can be used as an early warning system and promote good corporate governance. Other institutions, such as public accounting offices, appraisals companies, rating agencies also play an important role.

Bank Indonesia’s regulation PBI no. 7/2/PBI/2005 dated 20 January 2005, on the “Assessment of Quality of Productive Assets Owned by Commercial Banks”, implies that banks need to adjust their methodologies concerning the collectibility or quality of their credit provision by adding covenants on environmental considerations geared towards assessing the business sustainability of the debtors.

Introduction of BNI’s environment risk management system that includes an assessment of the environmental awareness of the customer and which affects the setting of interest rates.

Eco-friendly policies in BNI include training on environment awareness to loan officers, inclusion of environmental factors to the Industry Risk Rating, requirement of debtor’s commitment in environmental management, and inclusion of the factors as part of the early warning system.

BNI has participated in environment credit financing through commercial lending and soft loans lending provisions. To date the bank has worked with KfW in industrial efficiency and pollution control and with JBIC in pollution abatement equipment program.

Constraints faced by banks:

limited knowledge in waste management and clean development infrastructures;

lack of uniformity in implementation by banks;

rigid conditionalities by foreign partners; and

sustainable banking is still a new concept in Indonesia.

Constraints faced by debtors:

additional costs incurred through need for third parties (e.g. consultants) for feasibility studies or infrastructure installation;

general lacks of equipment (especially in the retail segment, such as device for processing leather; and

tardy licensing process, etc.

^topImplementation of and Lessons Leaned from Investment Screening in Plantation and Forestry sectorsMubarik Ahmad, Director of WWF Indonesia

Banks are the leading agents for change. It is in their interest to be concerned with the environment if they want to sustain their operations. The most profitable companies are the most environmentally friendly.

In the case of Indonesia, compliance to environmental considerations should be pursued more rigorously than what’s expected by the prevailing law. He points out a few cases whereby “environmentally friendly” projects have turned out to be the most environmentally destructive.

Suggests banks adopt some screening device for environmental risk management. WWF has developed guidelines for investment in operations that impact forests, and has forged working and/or initial relationships with individual banks, such as ABN-AMRO, HSBC, Rabobank. They create environmental check-lists, develop cost-efficient but robust screening and monitoring systems, and implement environmental and social risk assessment policies in the forestry-related sector, e.g. palm plantation, without sacrificing the banks’ competitiveness.

^topEnvironment in Banking Practices – Opportunities and ChallengesEdgardo F. Garcia, COO, Development Bank of the Philippines

Development Bank of the Philippines (DBP) has become associated as the bank for environment: “Sustainable development” is its guiding principle.

Over the past decade the government implemented at least four major environmental laws: the Clean Water Act (most recent), Toxic Chemicals and Hazardous Waste Management Act, Clean Air Act, and Solid Waste Management Act. All the new environmental laws have provided new opportunities for environmental investments. Several international funding institutions continue to offer environmental credit facilities. In the case of DBP, it has tapped on all these opportunities to be the “conduit of environmental credit facilities to worthy industries, businesses, services and even local governments.” Credit facilities offered by the DBP includes the JPY 5 billion Environmental Infrastructure Support Credit Program from JBIC; the World Bank and KfW.

Inclusion of environmental concerns is not easy. It means requiring borrower-companies to conduct environmental impact assessments and including loan conditions to ensure compliance with environmental regulatory requirements. New credit guidelines will raise concerns among bank officers, which can cause delays in loan processing.

Identifying which projects may classify as environmental is not straightforward. Borrowers may consider money for these investments do not add value to the company. Challenge is weighing the decision between developmental program and environmental risks. Mining, for example, is a key development program of the government, however, its has very high environmental risks.

Difficult as it all is, the DBP will never waiver in its objective to influence industries to be more proactive in environmental management and protection.

Introduction of ADFIAP’s experience on its “Greening of DFIs” project. Began in 1998 during the annual CEO Seminar of the World Federation of DFIs in Washington on the signing of the Washington Declaration of Sustainable Development and the Environment. ADFIAP is mainstreaming the issue through seminars in Asian countries using model green banks from among its membership.

Current initiative: Environmental Governance Standards (EGS) for DFIs in Asia–an 18-month EU grant-base undertaking. Aim: Development and initial application of EGS for member DFIs, consisting of two pillars, internal application within DFIs, and external Environmental Rating Standards for Loan Appraisal and Project Finance.

Jointly present on environmental risks and opportunities and their implications to banks.

Environmental issues may be both opportunities and risks for financial institutions. eg. Reputation leverage: Financial institutions are under closer scrutiny from various stakeholders, such as regulatory bodies, investors, local communities, NGOs among others. They may be affected by actions of other parties such as their borrowers.

JBIC, as part of its environmental awareness, has developed its Guidelines for Confirmation of Environmental and Social Considerations, which include provisions for screening, environmental reviewing, and monitoring; and objection procedures to ensure compliance; it focuses on the promotion of community participation and dialogues, confirmation of environment and social considerations; and proactive information disclosure.